As per section 15, the following income shall be chargeable to income-tax under the head "Salaries":
(A) any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;
(B) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due in that previous year or before it became due to him;
(C) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to Income-tax in any earlier previous year.
Important Notes :
- Where any salary paid in advance is included in the total income of any person for any previous year, it shall not be included again in the total income of the person when the salary becomes due.
- Any salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a firm from the firm shall not be regarded as salary for the purpose of this section. The same shall be taxable under the head profit or gains from business and profession as per section 28.
- The expression paid includes every receipt by the employee from the employer whether it was due to him or not. The expression allowed is of wider connotation and any credit to the employee's account is covered, thereby and it should imply that right is conferred on the employee in respect of the same..
- If the salary is payable on monthly basis, it normally becomes due at the end of the month although it is paid in the next month. In this case, it will be taxable on 'due' basis because 'due' is earlier than 'receipt'. Therefore, salary is normally taxable from April to March as the salary of March becomes due at the end of the month. However, in some cases the salary becomes due on the 1st day of the next month. In that case we shall tax the salary from March to February because salary of month of March of current year will be due only in the next financial year and the salary of month of March of last previous year became due only on 1st April of the current year.
- Arrears of Salary: Although salary is taxable on 'due' or 'receipt' basis whichever is earlier, but if there are any arrears of salary which have not been taxed in the past, such arrears will be taxed in the year in which these arrears are paid or allowed to the employee. For example, if the government announces increase in dearness allowance in the previous year 2019-20 which is effective from 1.1.2012 then arrears from 1.1.2012 to 31.3.2019 were never due earlier. These arrears will be taxed in the previous year in which these are paid or allowed although the arrears of salary relate to the past years. In such cases the assessee can claim relief of income-tax under section 89, if he so desires.
1. Meaning & Definition of ‘Salary’ [Section 17(1)]
Section 17(1) gives an inclusive definition of 'Salary'. Salary includes—
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;
(vi) any payment received by an employee in respect of any period of leave not availed by him;
(vii) Employer's contribution to Recognized Provident Fund (RPF) in excess of 12% of employee's salary and interest credited to recognized provident fund in excess of 9.5% p.a.) (For amendment made by the Finance Act, 2020);
(viii) the aggregate of all sums that are comprised in the transferred balance of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax;
(ix) the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a notified pension scheme referred to in section 80CCD (For amendment made by the Finance Act, 2020,).
Although the above incomes are included in salary, but there are certain incomes, mentioned above, which are either fully exempt or exempt, up to a certain limit. The aggregate of above incomes, after the exemption(s) available, if any, is known as “Gross Salary”.
From the ‘Gross Salary’, the following three deductions, are allowed under section 16:
(1) Standard deduction to the maximum extent of ₹50,000 (₹40,000 for A.Y. 2019-20) [Section 16(ia)]
(2) Deduction for entertainment allowance [Section 16(ii)]; and
(3) Deduction on account of any sum paid towards tax on employment [Section 16(iii)].
The amount arrived at, after allowing the above deductions, is the income under the head “Salaries”.